Since about a year ago when their business constituents began complaining that their insurance companies were telling them their policies do not cover their losses from the pandemic, lawmakers in a number of states have responded by filing legislation to require business insurance to cover losses from a pandemic.
No state has yet passed a pandemic business interruption mandate. But while lawmakers have not been able to deliver on their proposals to date, the proposals have not gone away.
In 2020, 16 states considered bills but they were either defeated or not acted upon, according to figures from the industry’s American Property Casualty Insurance Association (APCIA).
An Insurance Journal survey found that the states with proposals pending in 2021 include California, New Jersey, New York, Oregon, Texas, Rhode Island and Pennsylvania. One state, Washington, recently defeated its 2021 measure.
While they differ in approach and language, the state proposals seek to require any commercial property insurance policy to cover business interruption losses due to global virus or pandemic. The bills seek to apply coverage retroactively to 2020 coronavirus claims, which could cost the insurance industry billions, perhaps hundreds of billions by some industry estimates. They typically only apply to small businesses.
A New York bill would not only require insurers to cover certain business interruption losses stemming from the COVID-19 pandemic, but also void any virus exclusions in policies.
A California bill would create rebuttable presumptions that the virus was present on a property and caused physical loss or damage to that property, which was the direct cause of the business interruption.
Several states have called for a fund to reimburse insurers for any coronavirus BI payments they may make to insureds.
Under the Pennsylvania legislation, small businesses would receive 100% of their policy limits, and large businesses would receive 75% of their policy limits. The legislation would also preempt litigation between insurance companies and policyholders over COVID-19 related losses.
“You can see by the number of bills filed so far in 2021 that the interest is not fading,” said Stef Zielezienski, APCIA executive vice president and chief legal officer, who says the industry remains concerned whenever any proposals to “retroactively rewrite contracts are receiving attention.”
Insurers have argued that not only do most current commercial property policies not cover losses due to pandemics but also that pandemics are essentially uninsurable.
“The only entity large enough to sustain a nationwide loss that hits everywhere all at once is the federal government,” said Erin Collins, vice president of state affairs for the National Association of Mutual Insurance Companies (NAMIC), who noted that the industry has supported a federal solution for pandemic business interruption losses.
The denial of pandemic business interruption claims by many insurers has continued, as have lawsuits by businesses challenging those denials, although the number has slowed to a trickle after peaking last May, according to a University of Pennsylvania litigation tracker. This tracker shows that as of February of this year, U.S. businesses had filed 1,494 federal and state lawsuits challenging denied business interruption claims.
Thus far, in the 229 cases where courts have ruled, insurers have succeeded in having about 80% of the cases dismissed, with the majority of the dismissals coming on policies that had virus exclusions. There have also been a few victories for insureds where the policies lacked virus exclusions.
“The courts have largely recognized that insurance does not generally cover business continuity losses without physical damage, and most policies additionally include specific viral exclusions underscoring the uninsurability of such exposures,” said Zielezienski.
With many businesses losing their cases against their insurers in courts, the pressure on state lawmakers could remain to pursue the legislative proposals to mandate business interruption coverage.
New York Assemblyman Robert Carroll originally filed a bill last year that has gone through several amendments.
“I hope it moves as quickly as possible,” he said last year. “Obviously, these are very unique times for all of us, so I don’t have a specific timeline, but as soon as possible is what we’re trying to do.”
Carroll reintroduced his bill this year. The proposal requires insurers to cover business interruption losses and bans virus exclusions in policies going forward.
Pennsylvania state Senators Vincent J. Hughes and Sen. Katie J. Muth explained why they reintroduced their legislation this year. “Enabling businesses to make claims for their losses and damages will help businesses stay open, keep citizens employed, and provide stability to our struggling economy,” they said in their appeal to co-sponsors.
Last year, analysts at Standard & Poor’s said they did not expect state legislators to succeed in retroactively expanding business interruption insurance coverage because the insurance industry would fight it fiercely.
“We are taking the initial standpoint that these political efforts to retroactively change policy language will not materialize,” S&P Global Ratings credit analyst Tracy Dolin said.
Massachusetts state Senator James Eldridge saw his bill be rejected by fellow lawmakers last year.
“If we don’t find a way to provide financial support for these restaurants and businesses, whether it’s the insurance industry or government, many of them will never reopen,” Eldridge told Insurance Journal at the time. “And that won’t be good for anyone, including the insurance industry.”
If a state actually ever does pass one of these measures, the ramifications could be dire from an insurance market perspective.
“These proposals threaten industry stability to the detriment of all policyholders,” said Zielezienski.
Collins agrees that if a state were to enact a retroactive business interruption mandate, it would be destructive to its own insurance markets and to the businesses that rely on those markets.
“Pandemic is not an insurable event – forcing that mechanism would prevent markets from working for perils that are covered. Our small businesses need insurance markets to be there for them for the perils that have been contemplated and covered in their policies,” Collins said.
Some insurers have taken a lesson from the past year and are clarifying language in policies to bar claims related to the coronavirus pandemic or other widespread communicable diseases or illnesses that disrupt operations.
In addition, insurers are continuing to advocate for a federal solution to provide protection against widespread economic shutdowns due to a future viral outbreak.
According to Zielezienski, what is needed is a “multi-layer response that is simple to administer, widely available, affordable, and designed to keep business of all sizes open.”
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